Tag Archives: the-traveling-investor

Suburban Propane Partners Q4 Earnings Review: Good Performance Despite Higher Losses

Summary Operating loss increased from $34 million to $48 million. Integration costs and pension charges skewed results. Earnings should improve once these charges are eliminated. It’s been a week since Suburban Propane Partners (NYSE: SPH ) reported Q4 earnings, and the market remained neutral. Despite declining revenue and $48 million in operating loss, I believe that results were fantastic. Let me tell you why. As with many other natural gas related companies, sales suffered, dropping from $241 million to $174 million. The difference between this revenue decline and say a midstream company with POP contracts is that a lot of the company’s costs are variable. As the result of lower commodity prices, the company was actually able to increase the gross margin from 50% last year to 67%. This is a phenomenon that is common among refiners as well. What about the net loss? After all, the company did report an operating loss of $48 million. I would like to remind readers that the propane business is highly seasonal, and losses during warmer months are expected. (see below) As mentioned in my previous article , the company sells around two-thirds of retail volume from October to March, so the goal during hotter months is really to minimize loss. Unfortunately, the company does not seem to have accomplished that goal, as Q4’s operating loss of $48 million was higher than Q4 2014’s loss by 39%. However, there were multiple one-time costs that hurt Q4 results. First there is the integration cost. As mentioned in the previous article, the company acquired Inergy in 2012, and the integration process was still in progress in Q4 2015. During the quarter, the company spent $6.4 million on integration costs versus $3.2 million last year. This may be alarming since it would appear that integration costs are ramping up as opposed to going down. However, the management stated that the integration process was essentially complete, leading me to believe to that this cost increase is related to the “final push” as the company wraps up everything. Going forward, I expect integration costs to decline significantly or be eliminated. In addition to the integration costs, the company also had two pension related charges. First there was $11.3 million relating to the company’s partial withdrawal from a pension plan covering some former Inergy employees, which will save the company money later. If we account for these one-time charges, operating loss would actually decrease $30 million, which would be a 3% improvement from Q4 2014’s adjusted loss of $31 million. Keep in mind that the company was able to achieve this result despite the warmer weathers that we’ve been experiencing. When we take the above factors into consideration, I think it’s clear that the company’s Q4 performance was very impressive. Takeaway Despite mounting losses, I believe that the company had a great quarter when we take one-time factors into account. When you invest in Suburban Propane Partners, there is always the risk of warmer weather. Unfortunately that is what we’ve experienced in Q4, but that is what makes Q4 performance even more impressive. Overall, I believe that the company will improve earnings going forward as it gets rid of the one-time charges.

The V20 Portfolio Week #4: New Position, And A Bumpy Road Ahead

Summary The V20 Portfolio underperformed the index. Weight has not shifted from MagicJack to Conn’s, although it could happen after Q3 earnings. Spirit Airlines was added to the portfolio. Oil companies could be on the radar in the future. The V20 portfolio is an actively managed portfolio that seeks to achieve annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read last week’s update here ! Unfortunately it was another week of underperformance for the V20 Portfolio. Over the past week, the V20 Portfolio declined by 2.1% versus S&P 500’s minute gain of 0.17%. The biggest contributor to the decline was none other than Conn’s (NASDAQ: CONN ), the repeat offender. Its shares dropped from $23 on Monday to $19 at Friday’s close. Considering that the stock represented 28% of the V20 portfolio, a 17% decline definitely put a dent in our returns. Still No Shift In Portfolio Two weeks ago I mentioned that our position in MagicJack (NASDAQ: CALL ) was getting a bit bloated. You may be wondering, why did I not shift some of the weight to Conn’s. There are two reasons. The first one is that I don’t think the stock declined enough to warrant additional purchases. From the last purchase price of $23, the stock “only” declined by 21%. I say “only” because Conn’s has been so volatile that these movements don’t surprise me at all. As the company won’t have much news (other than sales releases) between now and Q3 earnings (December), the stock may continue to fluctuate wildly, meaning that there could be more headwinds for the stock over the short term. Secondly, MagicJack remains undervalued. Although it is not as attractive as before due to the substantial increase in share price (~40%) over the last little while, its Q3 earnings may serve as a strong catalyst for the market to push its shares to fair value. Considering that Q3 results are only a bit over a week away (November 9 th ), holding MagicJack still makes sense. That being said, if MagicJack appreciates substantially (20%+) without any change in fundamentals, then the weight should shift towards Conn’s as planned in the near future. New Position The new position is Spirit Airlines (NASDAQ: SAVE ) and you can read my analysis here . This investment is a rather unconventional one as value investors typically don’t like airlines. As Richard Branson puts it: “If you want to be a millionaire, start with a billion dollars and launch a new airline.” However, I think that the stock’s post-Q3 decline was completely unwarranted and the company still has a lot of growth potential as evident by its fleet expansion. One of the concerns was that the company’s revenue growth declined (driven by pricing pressure). It seems that investors underestimated competitive forces in the market and didn’t realize that if revenue growth stayed constant, the company would’ve earned 70% more than 2014, a quite unrealistic number in a competitive market. For that reason, I believe that what had transpired was very normal, hence the post-earnings crash provided an excellent opportunity for the V20 Portfolio to get some exposure to the airline industry. The Weeks Ahead Perion Network (NASDAQ: PERI ) will be releasing Q3 results on November 3rd. While not as significant as MagicJack, the stock still makes up a healthy chunk of the portfolio (> 10%), so I do expect some volatility on Tuesday. As mentioned earlier, MagicJack, which accounts for over 30% of the portfolio, is set to release Q3 results in less than two weeks. No matter the outcome, it will have a large impact on the overall portfolio. Unfortunately, high volatility is one of V20’s characteristics, an idea which I’ve emphasized since the beginning of this series . Because the V20 Portfolio now includes a fairly cyclical position (Spirit Airlines) that is prone to external shocks (i.e. oil), I will be looking at commodity investments that can offset movements in oil. I’ve debated about whether I should include oil stocks in the V20 Portfolio, as I’ve never considered them to be core holdings. However, now that Spirit Airlines exist in the portfolio, I believe some commodity exposure can be justified, as it can be treated as a hedge against the airline industry.

Low P/E Stock Of The Day No. 15: The AES Corporation

Summary Shares are currently trading at a P/E of 9.7x. Business are very stable due to contracts and low competition. However, the company has a poor record of asset allocation. In this series, I will select a low P/E stock to analyze. I define low P/E as anywhere from 5x to 10x, as any lower and we may be looking at special situations. Read the last edition here ! The AES Corporation (NYSE: AES ) is a diversified utility company whose operation spans across the globe. It has facilities in the U.S., Andes, Brazil, MCAC (Mexico, Central America, and Caribbean), Europe, and Asia. The company generates income from two lines of business, power generation and electricity distribution, this allows the company to capture profits across the value chain. Despite the company’s comprehensive offering, the stock meandered for years, and is currently trading at a TTM P/E of 9.7x. For an established and stable business, this is no doubt a low multiple. So is there a good justification? Stable Businesses The company’s power generation business currently sources from a variety of fuel types. Around 35% of the company’s plants are fueled by gas, 30% by coal, 29% by renewables, and 5% by oil, diesel, or petroleum coke. Evidently, the majority of the electricity is generated from environmentally friendly resources (natural gas and renewables), this is important as the governments around the world are imposing increasingly stringent environmental regulations. The power generation segment also operates on contracts. Although they are not decades long, the company’s average contract term is around 7 years, so they do provide stability in the medium term. The utility business primarily sells electricity directly to consumers (the power generation segment sells to corporate customers or other utility companies). This means that demand is not correlated to the general well-being of the economy, as consumers will use electricity no matter what. In addition, the company’s utility subsidiaries are often the sole distributors in their respective areas. This means that there is very little direct competition and it is unlikely that new entrants would want to compete with an established business that has already invested an enormous amount of capital on infrastructure. This provides a sustainable competitive advantage for the utility business. What I Don’t Like Despite revenue growth, the company has not been able to maintain the same level of profitability. This means that the management has not been keen on picking the right assets to invest in. In the graph above we can visualize the impact (or lack thereof) of growth. Over 10 years, revenue has risen 67% from $10.25 billion in 2005 to $17.15 billion in 2014. However, operating cash flow per share did not grow at all. This means that growth has not delivered any value to shareholders. In the chart below, we can see that the company has spent significant cash on various investments, which corresponds to the revenue growth. Without a corresponding rise in operating cash flow, I believe that the management is incapable of conducting proper asset allocation. Despite having a stable business, this alone makes me believe that the current P/E ratio is justified. Unless we see a management shakeup, I do not think that The AES Corporation would be a good investment. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.